Hilliard Lyons offers a wide array of investments to help you achieve your goals and objectives. Mutual Funds may be a good choice for you to consider. But before you invest in any type of security, you must first understand the associated risks, the costs involved, how costs and expenses are charged, and how your Wealth Advisor is compensated. This guide will help you make choices that best suit your needs. Each mutual fund is different, so you should carefully review its prospectus before investing.
What is a mutual fund?
A mutual fund is an investment company that pools money from many investors to buy a portfolio of securities under the advice of a professional portfolio manager. Mutual funds invest in various investments, including domestic or international stocks, bonds, money market instruments, or combinations of those assets. Each share of a mutual fund represents a proportion of the market value of the fund’s underlying securities. Your investment will fluctuate in value over time, and your mutual fund shares may be worth more or less when you sell them than when you bought them. The portfolio manager diversifies investments according to the fund’s investment objectives, as described in its prospectus. The prospectus provides important fund information, including risks, expenses, fees, past performance, opportunities for sales charge reductions, and trading costs in buying or selling the underlying securities.
What risks are associated with a mutual fund?
A mutual fund’s risks will vary depending on its type and its objective. Risks can include market, interest rate, credit, political, and business risk. Each fund’s prospectus describes its associated risks. You need to know your risk tolerance before choosing a mutual fund – and you should read a fund prospectus carefully to ensure that it matches that risk tolerance.
What costs are associated with a mutual fund?
Mutual funds have selling and operating costs that may affect the return on your investment. It is important to understand these costs to choose the right mutual fund for you. The fund’s prospectus contains important information
- Annual operating costs: Mutual funds incur operational and administrative expenses, including management fees payable to the portfolio managers and distribution fees (known as “12b-1” fees) payable to the fund’s distributor. In addition, charges from service providers, transfer agents, custodians, and accountants are also charged as a percentage of the fund’s net assets. There may be other costs involved with the buying and selling of securities within the fund that would reduce fund shares’ net asset value, or NAV. Operating expenses are not paid directly as a fee, but they are deducted from the fund’s assets, thereby reducing investment returns. Annual operating costs may vary among the different share classes of mutual funds offered.
- Sales charges and opportunities to reduce them: “Load” mutual funds charge a purchase (front-end) or redemption (back-end) fee, depending on the share class purchased. These charges compensate the fund company, the brokerage firm, and your Wealth Advisor. Mutual funds provide the opportunity to reduce or waive their front-end sales charges. These reductions, known as “breakpoints,” are based on factors such as the size of your current purchase, the value of your cumulative holdings and those of your immediate family within the fund family, and your intention to purchase a certain amount of funds within a specific period (generally 13 months) as expressed in a “letter of intent.” Breakpoint rules differ from fund to fund. It is important that you read the fund prospectus and understand and discuss with your Wealth Advisor any available breakpoint discounts.
- Share-class-based sales charges: Share classes are a way to categorize how the costs associated with a mutual fund are paid. Each share represents an equivalent interest in the mutual fund’s portfolio, but each class has expenses and fees applied differently. This results in different performances between the various classes. Mutual funds generally offer Class A, B, and C shares, although some offer more share class categories.
Class A shares impose a front-end sales charge at the time of purchase. This sales charge is deducted from your initial investment and, therefore, immediately reduces the dollar amount of the initial investment. The operating expenses are typically lower than Class B and Class C shares. For example: A client invests $10,000 into Class A shares of a mutual fund. If the front-end fee is 5.75%, the client would incur an up-front sales charge of $575, leaving a balance of $9,425 as the actual amount invested.
- Class A shares also have redemption charges if liquidated within certain periods, usually 90 days.
- Class A shares typically offer breakpoint discounts based on transaction size, cumulative existing holdings among you and your family within the fund company, and any intention you may have to purchase fund shares in a specific time frame (generally a 13-month period). A breakpoint can be based on the current purchase’s size.
Here is a typical schedule of front-end fees that decrease as breakpoints increase:
& balanced funds
|Bond & tax
|$25,000 to $50,000||5.00||3.75%|
|$50,000 to $100,000||4.50||3.75%|
|$100,000 to $250,000||3.50||3.50|
|$250,000 to $500,000||2.50||2.50|
|$500,000 to $750,000||2.00||2.00|
|$750,000 but <$1 million||1.50||1.50|
|> $1 million||0.00||0.00|
You can reach a higher breakpoint – and pay a lower fee – based on your (and your family’s) existing holdings within the fund company. Known as “rights of accumulation,” the proposed investment and the current value of existing holdings in a fund family determine the sales charge you pay. So tell your Wealth Advisor about all of your personal and family-related fund holdings, whether maintained by Hilliard Lyons or not, to maximize your breakpoint value.
Finally, you can reach a higher breakpoint (and a lower fee) by signing a letter of intent. A letter of intent combines all current and anticipated future investments in a single fund family so that you can immediately qualify for a higher breakpoint and its lower percentage sales charge. The letter of intent is valid for only a certain period – typically 13 months. If, after signing the letter of intent, you do not buy the additional shares as planned within the designated time period, the mutual fund company may increase the sales charge on prior purchases to reflect the sales charge that would have been assessed without the letter of intent.
Note that, if you qualify for a reduced sales charge due to commission breakpoints, buying mutual fund shares in a fee-based account (see below) may be more expensive.
- Class B shares do not have a front-end sales charge. Instead, they have a back-end sales charge, known as a “Contingent Deferred Sales Charge” (CDSC). The CDSC on Class B shares subjects investors to a declining fee schedule on liquidations that occur in the early years after a purchase, typically four to six years. For example:
Class B shares tend to have higher annual distribution expenses than A shares. After a specified number of years after the CDSC has ended, most Class B shares convert to Class A shares (without paying an additional up-front charge) with lower annual expenses.
- Class C shares typically do not have a front-end sales charge, but carry a back-end charge – usually 1% if the shares are redeemed within the first year of purchase. Class C shares tend to have higher annual distribution expenses than Class A and Class B shares. Generally, your Wealth Advisor is compensated 1% on an annual basis when you buy Class C shares. This amount is deducted from the net asset value of the mutual fund. Also, Class C shares do not generally convert to Class A shares at any time after the surrender period.
Which share class is right for you?
That depends on how long you intend to hold your mutual fund shares. Over long periods, C shares result in lower returns because they have higher fees than A shares, even though you pay no up-front commission with C shares. In the short term, A and B shares will return less than C shares. FINRA (the Financial Industry regulatory authority) offers a free tool for analyzing the effect of breakpoints and loads at www.finra.org/fundanalyzer.
Do fee-based accounts pay sales charges on mutual funds?
No. Fee-based accounts are assessed an annual fee, paid quarterly in advance, based on a percentage of the account’s value. Our fee-based accounts purchase institutional class, no-load, or load-waived mutual funds. For these funds, the mutual fund company assesses no front-end or back-end sales charges. But the fund company will still charge annual operating expenses and may make additional charges, such as 12b-1 fees.
How are Hilliard Lyons and its Wealth Advisors compensated?
Hilliard Lyons offers many mutual funds to clients. It is important that our Wealth Advisors evaluate these products as they help clients choose the investments that meet their needs. Because there are thousands of mutual funds available for sale, we identify a select group of approved providers that offer a broad spectrum of investments. If you purchase a mutual fund, Hilliard Lyons will receive compensation in the form of sales charges.
Revenue-sharing payments: In addition to the compensation received for the sale of mutual funds, Hilliard Lyons may get payments from distributors, investment advisors, or other entities affiliated with mutual funds (“sponsors”) to support training, backoffice operations, educational presentations, and sales support activities provided to Wealth Advisors. These payments are generally referred to as “revenue sharing” payments.
As of December 31, 2017, these mutual fund sponsors made revenue sharing payments of up to 20 basis points (0.20%) on gross sales to Hilliard Lyons: American Funds, Columbia Funds, Federated Funds, Franklin Templeton, Hartford Funds, and John Hancock.
For example, when revenue sharing is based on gross sales, the mutual fund sponsor pays a percentage of an investor’s total purchase of a mutual fund through a Wealth Advisor. A 20-basis-point revenue-sharing payment would be $2 per $1,000 invested.
We do not approve mutual fund sponsors as providers based on whether they make revenue-sharing payments to us. Our Wealth Advisors do not directly receive additional compensation in connection with the revenue sharing payments to Hilliard Lyons. Nevertheless, mutual fund sponsors that make revenue-sharing payments are more likely to provide more training and education services. So Wealth Advisors may prefer those sponsor’s mutual funds over others. Also, certain revenue sharing payments may be applied toward award trips designed to recognize our top Wealth Advisors.
Representatives of mutual fund sponsors may attend these trips. Wealth Advisors who qualify for these trips are not required to sell any certain provider’s product
Sponsorship payments: In addition to revenue sharing, Hilliard Lyons may receive payments from distributors, investment advisors, or other entities affiliated with mutual funds to sponsor award trips for Wealth Advisors and company-wide conferences or events. These payments are generally referred to as “sponsorship payments.” Other service providers not listed here may pay directly for educational seminars for Wealth Advisors or clients.
During 2017, these mutual fund sponsors made sponsorship payments to Hilliard Lyons of up to $75,000: American Funds, Deutsche Funds, Federated, First Trust, Franklin Templeton, Invesco Funds, LoCorr Funds, MFS, PIMCO, and Russell Investments.
What does all of this mean to you?
To choose an appropriate mutual fund, you need to understand not only what a mutual fund is but also the fund’s investment time horizon, investment objective, performance history, risk factors, and associated expenses and fees. All of these factors are set out in the mutual fund’s prospectus. To fully evaluate all fund options, you should review your investment objectives and goals with your Wealth Advisor and review the prospectus to determine whether a particular mutual fund is an appropriate investment.
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